Commentary: Can North America unconventionals replace lost Mideast oil?

Since Egyptian president Hosni Mubarak fell from power in February 2011, U.S. and Canadian oil production has risen by a total of 2.57 million barrels a day. That’s three times that amount of oil production that has been lost to world supply directly from Arab Spring violence in Syria, Yemen and Bahrain and still roughly 1 million b/d more than losses that would include the 700,000 b/d or so disrupted by labor unrest and violence at oil export ports and production infrastructure in Libya in August. To date, Iraqi oil production has not been adversely affected by contagion effects of violence and unrest in neighboring countries, and has in fact increased by 300,000 b/d since Mubarak’s demise. Oman’s oil production has similarly been resilient despite sporadic oil worker strikes. Egyptian production has been volatile, but is not currently far off the 640,000 b/d before the country’s strife. It remains to be seen what the long term impact will be of prolonged unrest, Apache’s sale of a 33 % stake in its Egyptian upstream assets to China’s Sinopec and Egypt’s continuing arrears problem with Western upstream operators.

If the unconventionals vs Mideast losses tally factors in lower oil production from Iran as a result of tighter Western sanctions policies against Tehran, on balance rising output from unconventional North American plays is still close to replacing all the oil production that has been lost so far since the beginning of 2011 from the Middle East.

As companies like Apache, Hess and ConocoPhillips shed foreign investment positions to repatriate money back to invest in North America, the question arises whether North American oil production increases can continue to keep pace with additional capacity losses that might ensue as a result of the chaos and armed conflicts raging across the Middle East. Clearly, oil traders don’t think so, given the rise in spot prices in recent weeks as escalation of the Syrian conflict looked imminent. Syria’s oil production potential is small and Syrian oil has been out of the market for a long time. Syrian war news impact on oil prices reflects mainly worries that the conflict, which involves proxies backed by energy export heavy weights Saudi Arabia, Qatar and Iran, would spread to these regional “sponsor” countries.

Timing and scale will be major factors determining whether unconventional oil and gas can continue to replace barrel for barrel cumulative additional lost production from geopolitical turmoil. Venezuela’s output is falling in the wake of that country’s leadership transition. On the flip side, however, Mexico may see its output rally, if reforms now under debate translate into positive gains in investment in Mexico’s vast unconventional resources. Mexico has declared its aspiration to be a natural gas exporter by the end of the decade, reversing its increasing import requirements from the United States. That might free up more U.S. gas for export elsewhere, perhaps as LNG to Asia or Europe. Progress in Canada’s unconventional plays will also mean U.S. natural gas liquids (NGLs), condensate and tight oil will have to find another home.

But the prospects that U.S. tight oil production may continue to rise by another 1 to 3 million b/d over the next few years isn’t likely be enough to countermand a major problem with exports were they to emanate from larger Mideast players such as Saudi Arabia or Iraq. For now, this is keeping a floor under oil prices despite a recent jump in Saudi oil production above 10 million barrels a day. Should players to the Syrian conflict shift to a more workable diplomatic path, market psychology could change on a dime. A simple ceasefire might focus the market more intently on rising non-OPEC supplies, causing a tumble in prices. But what about a deal that enabled better cooperation between Saudi Arabia and Russia? That might move the balance in the other direction, allowing a coalition of the willing to hold prices steady, at least in the short term.